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$700 Billion is a lot of Guacamole!

paulsonAn article in today’s  Forbes online entitled Trouble with TARP,  reports a growing concern by the Congressional Oversight Panel (COP) about the effectiveness of the $700 billion program.  The COP reports that the effectiveness of the program is difficult to determine due to lack of transparency of how funds were spent.  The COP report also states that the absence of any reporting guidelines for TARP participants impedes effective oversight.

The 145 page report starts with a retelling of the extreme conditions confronting the banking sector as the credit crisis exploded last autumn.  It also outlines the choices confronting regulators, legislators and industry executives as the crisis deepened.  We were led to believe by Treasury and Federal Reserve officials that the global banking system was in imminent  danger of collapse.  Nothing less then immediate and drastic measures taken by sovereign government officials and industry executives would prevent the catastrophic consequences of global economic carnage.  The report makes it clear that these market conditions were so extreme that regulators were navigating through uncharted waters.  Any remediation measures taken had little historical precedence to guide actions.  Hence Paulson was given carte blanche to handle the crisis with unprecedented latitude and executive facility.

As this blog reported earlier this week, the TARP was originally designed to acquire troubled assets from banking institutions.  TARP funds were earmarked to purchase mortgage backed securities and other derivatives whose distressed valuations severely eroded capital ratios and stressed banks balance sheets.  Hank Paulson later shifted the strategy and decided to inject TARP funds into the banks equity base.  This has done wonders for the shareholders of the banks but troubled assets remain on the banks balance sheet.  As the recession continues,  unemployment, home foreclosures, SME bankruptcies and the looming problem with commercial mortgage backed securities  (CMBS) are placing a new round of added strain on the banking system.

The TALF program is designed to draw private money into partnership with the government to acquire troubled assets from banks.  So far the program has received a tepid response.  I suspect that the principal factors inhibiting the expansion of the TALF program are numerous.  Chief among them is the inability of FASB to decide upon valuation guidelines of Level III Assets.  Banks holding distressed securities may also be reluctant to part with these assets because they have tremendous upside potential as the economy improves.

The COP also questioned the effectiveness of TARP because stress tests were only conducted on 19 banks.  The report states that additional  stress tests may be required because the previous tests failed to account for the length and depth and length of the recession.   Community banks are also of concern.  They face a perfect storm in challenging macroeconomic conditions.  Of particular concern is commercial real estate loans.  Many economists are concerned that high rate of loan defaults in commercial loan portfolios pose great threats to the community banking sector.

Though interest rates remain low due to the actions of the Federal Reserve,  lending by banks still remains weak.  SME’s are capital starved and bankruptcy rates are quickly rising.  SME’s are critical to any economic recovery scenario.  A strong SME sector is also crucial for a vibrant and profitable banking system.  Perhaps a second round of TARP funding may be required to get more credit flowing to SME’s.  If banks start failing again it would be devastating.  The Treasury and the Federal Reserve don’t have many bullets left to fire  because of all the previous expenditures and a waning political will of the people to continue to fund a systemically damaged banking system.

Risk: banks, SME, economy, credit, market

You Tube Video Music: Billie Holiday with Lester Young, Pennies from Heaven

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August 13, 2009 Posted by | banking, credit crisis, economics, FASB, Paulson, real estate, recession, regulatory, SME, TALF, TARP, Treasury, Uncategorized, unemployment | , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

Corporate Extinctions

A large meteor that hit the Yucatan peninsula 65 million years ago is considered one of the causal factors that led to the mass extinction of the dinosaurs. The theory gained wide acceptance after a photogemmetric satellite captured the image of the Chicxulub Crater centered just off the peninsulas northeast shore. The meteor theory seemed to solve the dinosaur extinction mystery of how a dominant species that ruled the earth for 200 million years can suddenly disappear. Apparently the theory suggests that the extinction happened more with a bang then a whimper.

Like the Chicxulub meteor, the economic crash of 2008 promises to claim a dramatic toll of corporate victims and drastically alter the landscape of the global capitalist system. The casualty list prominently includes some marquis corporate banking brands like Bear Stearns, Lehman Brothers, WAMU, Wachovia, Fannie, Freddie, Fortis, RBS, NorthernRock and threatens to claim the solvent souls of a UBS or Citibank. The State of California and the Sovereign State of Iceland are also endangered and the economic crisis may claim them as its biggest prize.

Hedge funds are quickly folding up shop. Morgan Stanley estimates that the AUM of the industry may shrink from $1.9tr to $900bn due to market losses and investor redemption and withdrawals. At its peak the global hedge fund industry was estimated to offer AIM products by over 6000 providers. By the close of the next year the size of the industry will be considerably smaller as capacity downsizes to serve less demand. Downsizing will also be the prevailing theme for community banks, RIA’s and CTA’s as excess capacity is worked out of the system through closures, consolidations and seizures. This contraction will effect industry service providers that sell services to the financial services market. Lawyers, accountants, IT providers and consultants will be hard pressed to maintain their book of business as the market for their services contracts.

Free marketeers and Social Darwinists may find it right and fitting that the financial services industry comprises the bulk of the corporate casualty list due to their culpability in nurturing this economic apocalypse and their proximity to the epicenter of the crash. The Hollow Men who led the US economic colossus to this dramatic self immolation however won’t have to fall on their swords. Their champion in the Treasury Mr. Paulson has swaddled them in a protective TARP so these masters of the universe can don superman capes to continue their selfless endeavor of saving the US economy from a total collapse.

Unfortunately the deadly meteor that almost liquidated the banking system is spreading outward to what some refer to as the real economy. Goldman Sachs’ indicates that the recession will shave a cool $1.3tr from the GDP. This will inhibit buying power by individuals, corporations and governments. Some economists fear that this will create enormous deflationary pressure prolonging the recession. Many see similarities with the Japanese recession of the 1980’s. That recession brought on by the burst of Godzilla sized real estate and equity market bubbles lasted for over a decade. Japanese central bankers cut interest rates to almost zero and the vicious downward spiral of the economy recovered as a result of SE Asian and North American market demand drivers that fueled tremendous export growth.

Retail is another sector that will be particularly hit hard by corporate failures. Industry statistics indicate that 14,000 retailers are expected to close their doors during the next year. US auto dealerships from the Big Three are expected to contract by 25%. The auto industry is a major hub of a large and intricate manufacturing supply chain and as such this sector will be hit hard with business closures as well. Construction, housing and domestic oriented leisure industries will continue to stagnate as the American consumer buying power evaporates. Not good news for an economy so strongly dependent on consumer spending.

Yesterday the National Bureau of Economic Research (NBER) announced that the economy went into a recession in December 2007. Its a bit funny that it took a year for the NBER to hear, feel and detect the Chicxulub Meteor that crashed into our economy. Today’s Employment Report from ADP indicates that the US economy shed another 250,000 jobs during the month of November. Now that the reality of the recession is upon us the corporate endangered species list will be a pressing problem and success metric that the Obama Administration will need to squarely address with any stimulus package he plans to enact to get the economy moving again. This actually bodes well for the passage of a rescue package for the Big Three Automakers. One thing is certain, urgent action is required or our economy will continue to go down not with a bang but with a whimper.

You tube video: Ranny Weeks and Orchestra: Out of Nowhere

Risk: recession, bankruptcy, solvency, rescue package, economic stimulus

December 4, 2008 Posted by | banking, bankruptsy, Bear Stearns, economics, Paulson, unemployment | , , , , | Leave a comment

Conference Call with Hank

National Federation of Independent Business (NFIB) members had an opportunity to participate in a conference call with Secretary of the Treasury Henry Paulson. Mr. Paulson was keen to solicit the support of NFIB members for the passage of the Emergency Economic Stabilization Act, (EESA).

NFIB members are small business owners who are generally very conservative, free market advocates who vigorously support tax relief, oppose regulatory oversight and large governmental spending programs. NFIB member firms are the entrepreneurs, shopkeepers, service providers and small business risk takers who populate the small stores and office space on Main Street USA.

Small business owners are a politically vocal and influential constituency whose support proponents need to gain passage of EESA. Last night EESA passed the Senate. It will now return to the House of Representatives for a vote. Secretary Paulson asked NFIB members to contact congressmen, senators and media to urge support of EESA passage.

Key points raised were as follows:

FDIC deposit insurance limit was raised to $250,000

EESA Bill included riders with tax cuts and other rebate incentives

EESA has a recoupment provision “put” that allows Treasury to sell assets back to banks at a previously agreed upon price

Failure of EESA will curtail community bank lending activity to small businesses

Large businesses and municipalities dependent on credit markets for short term funding will scale back purchases with small businesses

Current Treasury tools are not sufficient to deal with problem

EESA funding (Federal Budget program cuts) will need to be addressed in next budget cycle

Regulatory frameworks of financial services industry need to be streamlined, strengthened and reformed

Mark to Market of toxic bank assets will help to temporarily address bank solvency and capitalization ratios

Music Video: Blondie, Hangin on the Telephone

Risk: bank solvency, credit, interest rates, recession

October 2, 2008 Posted by | credit crisis, EESA, Paulson, TARP, Treasury | , , , , , , | Leave a comment